To judge from the sudden proliferation of Porsche SUVs on the streets of Lower Manhattan, this has been a good year for investment bankers. Indeed, U.S. merger-and-acquisition activity reached $370 billion during the second quarter, its highest level since 1999, according to Thomson Financial. At the same time, another kind of transaction has been booming: share buybacks. Treasury stock, as repurchased shares are known, now accounts for 10 percent of the total market capitalization of the S&P 500.
Although seemingly unrelated, these two trends may soon intersect. After a buyback, firms don’t have to put shares back on the market, but experience shows that they eventually do, says Howard Silverblatt, senior index analyst for Standard & Poor’s. “Companies don’t have a history of sitting on repurchased shares for long,” he says.
When companies do start to reissue shares, adds Silverblatt, the most likely use will be for mergers, since many managers see stock as a cheap (and tax-deferred) way of paying for a deal. And investors are more willing to put up with dilution if shares are used for a good acquisition.
There is a less obvious benefit. New York Stock Exchange rules call for shareholder approval whenever a company wants to issue new stock that would account for 20 percent or more of shares outstanding. But treasury stock doesn’t count toward that total, according to Atilla Bodi of McDermott, Will & Emery. Sovereign Bancorp exploited this exception last year when it used treasury shares to override shareholder objections to its purchase of Independence Community Bank.
The outcome of all of this may be that the cash that goes toward a buyback — typically perceived as an alternative to making an acquisition — may end up fueling the M&A machine anyway. And that will surely help the bankers keep the fuel tanks of those new Porches full.
Buyback and Then Buy
Share-based acquisition announcements preceded by or coincidental with share buybacks*
|Acquirer||Buyback Date||Acquisition Date||Target|
|National City||10/24/05||7/27/06||Fidelity Bankshares|
|First Community Bancorp||5/3/06||5/16/06||Community Bancorp|
|Thermo Electron||3/1/06||5/8/06||Fisher Scientific|
|First Bancorp of Indiana||9/9/05||4/25/06||Home Building Bancorp|
*Source: Thomson Financial
**Source: Standard & Poor’s